Hits and Misses in 2013 Predictions

Which experts were right, and who was wrong, in their predictions for 2013? This year's roundup follows, but keep this in mind as we check the winners and losers in the parlor game that is economic forecasting: The mood was pretty grim in December 2012.

Gallup surveys conducted in December 2012 showed the mood just when the fiscal cliff fight morphed into a dispiriting melodrama. Only one in three Americans believed 2013 would be “a year of economic prosperity” and fewer than one in four believed it would be a year of international peace.

But 2013 ended better than expected, despite the fears about federal sequestration cuts and the costume drama of budget fights that had the U.S. looking like Uzbekistan. The U.S. economy grew at an annualized 4.1% annual pace in the third quarter, up from the expected 2.8% pace.

Of course, that was partly because the federal government got creative in 2013 by giving a greater economic weighting to the creation of many types of intellectual property — like Hollywood movies, music, books and research into things like biotech drugs. That added an estimated $550 billion to U.S. GDP, the equivalent of adding Colombia to the U.S.’s books.

Massive fiscal spending and unprecedented monetary expansion that has the Federal Reserve’s balance sheet now at $4 trillion also papered over problems (on top of world central banks’ trillions of dollars in help to rescue the banking sector).

Stocks, Bonds and GDP Recap

Both the Dow Jones Industrial Average and the S&P 500 are up just shy of 30% in 2013, and the world’s major stock markets added $6 trillion in value this past year, from $57.1 trillion in January to a record $63.4 trillion as of November, says the World Federation of Exchanges. U.S. corporate profits continued to power ahead. Corporate earnings stood at $1.75 trillion in the third quarter, up 18.6% versus the year prior.

The “No Lonesome Doves” Federal Reserve continued to help with $85 billion in monthly bond purchases, enacting a taper-lite that the market liked, with its zero-bound rate policy still in effect and a slight $10 billion monthly reduction in bond purchases. As of year-end, the 10-year Treasury note was holding steady at 2.99%.

Still, GDP before the government’s revisions stayed sickly. Monthly GDP growth averaged around 2.4% annualized. Analysts pointed out that there has never been a 12-quarter period of expansion that ran as slow as 2.4% going back to 1950.

Economists polled said odds of a recession in 2013 were just 24%. Economists also estimated the chances of greater than 3% growth next year were exactly the same odds, 24%. On average they had expected growth of 2.3% in 2013, a bit better than the 1.9% of 2012.

Bill Miller, chairman, Legg Mason Capital Management, January 2013: “The great bond bear market has begun, starting with Treasuries, which should see years of losses as interest rates gradually normalize. Equities, which outperformed bonds in 2012, will continue to do well, driven by rising earnings, strong free cash flow, solid profit margins, low inflation and attractive valuation relative to bonds. The path of least resistance for stocks and the economy is higher. The chief risk is the dysfunctional political environment, which could derail what otherwise is a very promising outlook.” (Click here: http://www.nytimes.com/2013/01/12/business/economic-experts-give-predictions-for-2013.html?pagewanted=2&_r=0).

Vanguard: “Stock market returns will be centered in the 6%−9% return range” and U.S. growth will “persist at a reduced 2% trend real GDP growth rate” in 2013. Expected the yield on the 10-year Treasury bond to remain in its current range of 1.5%−2.5% over the next year at least (see here: https://personal.vanguard.com/pdf/s358.pdf).

Andrew Lapthorne of Societe Generale: Said in early 2013 that corporate profit growth expectations for U.S. companies for 2013 would drop from 9.7% to 8.4%.

IHS: U.S. recovery will gradually pick up steam and will average around 2% growth in 2013

Jan Hatzius, chief economist, Global Investment Research, Goldman Sachs: Said in December 2012: “We do expect another relatively weak year for growth in the global economy.” On the other side, “2013 might feel a little friendlier than 2012.”

National Assn. for Business Economics: Gross domestic product will expand in 2013 at an average annual growth rate of 2.1%.

The unemployment rate fell to 7.0% as of November, the lowest since the fall of 2008, as the U.S. added a tepid 203,000 jobs that month. Still, 11 million Americans remain unemployed, about 14% of Americans remain unemployed or underemployed, and the labor force participation rate is stuck at 1978 levels.

The job market has been improving at a frustratingly slow pace for three years, as the number of part-time jobs continues to rise, flattening wage growth and household income. The President continued to make populist speeches focusing on the fallout of a poor job market, income inequality, while economists continue to point out that income inequality is solved through economic growth that creates more jobs. That included getting the dry powder that is the $2 trillion plus in corporate cash parked overseas back home. Broadening the tax base will also create more tax revenues, analysts continue to note, adding that the OECD has said the U.S. continues to have one of the most progressive tax systems in the world. The poor U.S. jobs performance was debated on Wall Street as the likely reason why the Federal Reserve enacted taper-lite.

National Assn. for Business Economics: 48 economists saw the jobless rate averaging 7.7% in 2013, the same rate at the end of 2012.

Economists surveyed by the Wall Street Journal in December 2012: Expected the unemployment rate to tick down only to 7.5% by the end of 2013, from 7.7% at that time, and wouldn’t be back to 5.5% before 2016.

Inflation was relatively tame in 2013, and commodity prices were largely flat in 2013 as of October, according to the World Bank.

“In October of 2013, energy prices decreased by 2.5%, while the non-energy commodities were slightly up by 0.3%. Food prices were flat (up 0.1%), beverages increased by 0.7%, raw materials edged up by 0.3%, while fertilizers declined 3.8%. Metals moved up by 1.1%, while precious metals decreased 2.5%.” (see here). But the euro was stronger versus the dollar in 2013, up more than 4% versus the dollar.

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U.S. stocks ended down on Tuesday in a retreat from the previous session's sharp rally as energy shares declined and the dollar edged up, but the S&P 500 and Nasdaq registered their ninth straight quarterly rise.